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Saturday, October 6, 2012

I have had quite some queries on
the recent market conditions and what is my outlook. So here are my views.

We all know that our government
always knew what is required to be done – but they did not have the political courage
to do it. The Congress is now in a do or die situation – if they do not act
now, they will find it difficult to showcase their governance record in the
2014 Lok Sabha elections. And hence this recent burst of reformist measures –
after all they too need a job after 2014.

The next 12 months, I expect the
government to be keeping up this pro reform agenda –they will talk the markets
up with one reform a week (something like –“an apple a day____). India needs capital from abroad for growth and
the world markets are flush with cheap liquidity. So the government in India
will try its darn best to attract global capital to India. And the opposition will try to stymie these
efforts and that’s something we will need to live with – the Indian political theatre.

But overall the Indian markets
should do well over the next 12-14 months.

But that is only half the story.

The remaining half is the global
market outlook itself – here, the situation is not that rosy. The economies of US,
EU and Japan are struggling to stay afloat –the central banks in these
countries are giving large doses of liquidity (it is akin to keeping a patient
alive on drips) – without these doses of liquidity, these economies would get
into recessionary mode.The stock
markets, the real estate markets and the consumer sentiment in these countries
is being propped up by the low interest rates ( cheap money) – this has been
going on since 2008 and the economies are not doing any better- but they are managing to stave off
recession.

Will the situation change in the
next 1-2 years?

I do not think so.

These countries will continue to
drip feed their economies by keeping interest rates low and infusing liquidity
into the economies as and when required. Some of this money will trickle into
Indian economy due to our “reformist government” and will keep our stock
markets in good cheer.

So till here everything looks fine – both the
global markets and Indian markets will do well in the next 12-14 months even
though the global markets are being propped up by low interest rates.

But there is one event next year that
could be a game changer - the Iran problem.

With the conclusion of US Presidential
elections, focus will be back on Iran. There will be pressure on Iran to give
up its nuclear programme and I expect Iran not to surrender meekly. I expect
increase in tensions and somewhere in Q2 2012, there could be some kind of
flash point. Many scenarios are being talked about – about how it could unfold.
It could happen through Iran mining of the Strait of Hormuz, or may happen
through the current strife in Syria where Iran, Turkey and Israel get involved
as the country dissolves into chaos, or it could be through Lebanon, where Iran
could activate the Shiite militia to attack Northern Israel or it could happen
pure and simple by Israel delivering a surprise attack on Iran’s nuclear
installations.

Whatever the scenario, there is a likely hood
of a prolonged regional disturbance – it could result in oil prices going up,
stock markets going volatile and one cannot predict to what extent the
global economy will be impacted. This can present opportunities as well as
threats and one needs to be careful.

So this is the situation - the India story looks good (12-14 months) – the
global story, without Iran problem, looks OK - but the Iran issue is like the
looming dark cloud in the horizon.

I would recommend that you stay
invested in the Indian stock markets – surely till Q1 2013.

This is a period when gold and
stocks will rise at the same time. Gold will rise in USD terms more as there is
increase in liquidity globally – and depending on the short term fluctuation in
the USD/INR rate, gold is expected to give inflation plus 3-5% at least in
India ( i.e. about 13-15% ROI per annum).

Stocks surely could do better
than that.

So my advice is to stay invested
in stocks and gold and keep a close eye on the developments in Iran.